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Japan's economy shrank last quarter as exports tumbled and consumer spending slumped, putting pressure on the central bank to add stimulus and hurting Prime Minister Yoshihiko Noda's record as he prepares for elections.

Gross domestic product fell an annualised 3.5 per cent, the most since the earthquake and tsunami last year, Cabinet Office data showed yesterday. Shipments to Asia, Europe and the United States all slid, as did capital spending.

With analysts also seeing a GDP decline this quarter, according to a survey last week, Japan faces the risk of its third textbook-definition recession since 2008. The deterioration may undermine plans by Noda to implement the nation's first sales-tax rise in more than a decade, and raises the stakes of a political impasse that has left the government running out of cash.

"It will take a while for Japan to get back to a sound recovery, considering a modest pick-up in the global economy at best and the country's damaged relationship with China."

Exports to China have been undermined by anti-Japanese sentiment in the aftermath of the Noda administration's purchase from a private owner of islands that China also claims.

The yen was little changed at 79.51 per US dollar in Tokyo. The Nikkei-225 Index, which is down about 15 per cent from this year's high in March, fell 0.93 per cent to 8,876.44 points.

In the region, India's industrial production fell 0.4 per cent in September from a year earlier, the government reported. Inflation in October rose to 9.75 per cent year on year.

Yesterday's data showed that Japan's economy was approaching its smallest size since at least 1993, with nominal GDP recording its third-lowest level since the current data series began.

The world's third-largest economy will probably shrink at an annual pace of 0.4 per cent this quarter, according to the median forecast of 24 economists in a survey. That would be the third technical recession since 2008. Japanese recessions are defined by a government panel that considers data beyond GDP figures.

On a quarterly basis, the economy shrank 0.9 per cent in the July-September period, the data showed.

Private consumption posted the first back-to-back drop last quarter since the six months to March 2009, declining 0.5 per cent from the previous quarter as government subsidies for fuel-efficient cars ended. Capital investment dropped 3.2 per cent, the steepest fall since the second quarter of 2009.

"The GDP figures were grim," Noda said in parliament after the data release, as he pledged to instil a "sense of urgency" in his government's economic policy.

Even as Noda retains the option of a supplemental budget, his room for fiscal manoeuvre has been limited by the political opposition's refusal to give his administration the authority to borrow to pay for this year's deficit amid a dispute over the timing of an election that the prime minister has pledged to call "soon". Parliamentary debate on issuing debt to cover about 40 per cent of spending for this fiscal year began last week.

The worsening economy also threatens Noda's plan to rein in Japan's public debt, which is the highest in the world. Legislation passed in August to increase the sales tax to 8 per cent in April 2014 and 10 per cent in 2015 allows the rise to be cancelled based on an assessment of economic conditions.

"Bond market players may start to discount the probability of a tax rise in 2014", which could really destabilise the Japanese government bond market, said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group in Tokyo and a former Bank of Japan official.